Two Major Surprises Today: China’s PMI On The Downside And Eurozone CPI On The Ups |

was sold against nearly all the currencies today. Among the majors, the Antipodeans and led the move. The rose briefly through $1.1830 in the European morning, its best level in a little more than three weeks. The JP Morgan Emerging Market Currency Index was rising for the seventh time in eight sessions.

The risk-on mode to finish the month was evident in equities as well. Following the new record highs in the US, the climbed for the sixth session in the past seven and took out the two-and-a-half-month downtrend. Europe’s Dow Jones was rising for its third consecutive session, while US futures indices were extending their recent gains. Debt markets were quiet.

The was hovering around 1.28%, while European yields were 1-3 bp firmer, following the higher than expected August CPI. The UK Gilts were a notable exception, and the yield was nearly two basis points lower at 0.66%, perhaps helped by , which was at a new two-week high.

found support near the 200-day moving average (~$1809) and was trading inside yesterday’s range when it peaked around $1823. prices were surrendering yesterday’s late gains. OPEC+ meets tomorrow. Output is scheduled to rise by 400k barrels per day, but there were concerns about the strength of demand in the face of the spread of COVID. October WTI finished last month near $73.25. It was near $68.40 after last week’s 10.6% rally.

China’s iron ore contract snapped a six-day advance today, slumped almost 2.5%. was up slightly for the third consecutive session and the seventh in the past eight. The rose yesterday for the fifth time in the last six sessions and set a new high for August. It was within striking distance of the six-year high set at the end of July.

Asia Pacific

The risk-on move today was surprising given the poor Chinese PMI. The slipped a little more than expected to 50.1 from 50.4, but the real shocker was the . It slumped to 47.5 from 53.3. The median forecast in Bloomberg’s survey anticipated a pullback to 52.0 from 53.3.

This drove the to 48.9, its first reading below the 50 boom/bust level since February 2020. The composite peaked in May at 54.2 and has fallen in each of the following three months. Recall that the PBOC cut reserve requirements in July. Today’s dismal reading was likely to fan expectations for further accommodation.

On the other hand, Japan’s data was generally better than expected.  fell 1.5% in July. That may not sound so good, but it followed a 6.5% jump in June and was better than the 2.5% drop of the median forecast in Bloomberg’s survey.

In addition, the unexpectedly slipped to 2.8% from 2.9%, and the rose to 1.15 from 1.13, defying forecasts for a decline. Lastly, also rose more than expected. However, with a formal COVID emergency covering more than 70% of the population, the recovery is not expected to gain much traction until Q4.

The virus could be knocking Australia into a contraction. The was a little smaller than expected but was offset to some extent by the upward revision to Q1. To the extent that Australia’s current account is driven by trade flows, we are concerned that the rise in prices has concealed a decline in volumes.

Separately, Australian slumped in July by 8.6%, more than expected, and follows a 5.5% decline in June (initially reported a -6.7%). The final August PMI due later this week is expected to confirm the 43.5 preliminary composite reading, though the risk is on the downside.

The remained confirmed to a narrow range below JPY110.00, and it is holding above yesterday’s JPY109.70 low, where a nearly $400 mln option was set to expire later today. Recall that the dollar settled last month slightly above JPY109.70 too.

After consolidating its pre-weekend gain yesterday, the was pushed higher to $0.7340 today to test the two-week high. Initial support was seen around $0.7320. Some buying may have been related to the A$588 mln option at $0.7300 expiring today. The next area of chart resistance was seen in the $0.7370-$0.7380 area.

Despite the disappointing data, the dollar eased toward the lower end of its recent range against the . It found support in front of CNY6.4570. The yuan, like the yen, was nearly flat on the month. The dollar ended July near CNY6.4615. The PBOC set the dollar’s reference rate at CNY6.4679, tight to expectations of CNY6.4680.


Today’s upside surprises by French and Italian inflation readings helped lift the to 3.0% from 2.2% in July. The median forecast in Bloomberg’s survey was for a rise to 2.7%. The measure also rose more than expected to stand at 1.6%, up from 0.7% in July. The month-over-month increase of 0.4% was twice what had been expected.

Recall that Germany’s actually slipped to 3.4% from 3.5% when reported yesterday, while Spain surprised with a 3.3% rate instead of 2.9%. Italy’s was “supposed” to fall by 0.2% but instead rose by 0.3%, and the rate surged to 2.6% from 1.0%. French rose 0. 7% this month to lift the rate to 2.4% from 1.5%.

However, the French surprise was even more pronounced in the July consumption report. The median forecast in Bloomberg’s survey called for a 0.2% increase in . Instead, it crashed by 2.2%. Consider that French consumer spending fell by an average of 0.1% a month in the first six months of the year. The only kind thing to be said is that it has become a volatile number under COVID.

Germany had a pleasant surprise. Its fell this month to 5.5% from 5.6% in July (that was initially reported at 5.7%). The unemployment queue fell by 53k, more than the 40k decline forecast. Note that Germany lost about 650k jobs in Q2 20 and has since gained back about 400k.

The euro posted an outside up day before the weekend, and follow-through yesterday was limited to about $1.1810. Additional buying today lifted it through $1.1830, its best level since Aug. 6. It was rising for the seventh session in the past eight. An expiring option at $1.1875 for almost 720 mln euros seemed too far to be relevant today, but tomorrow there is a nearly 650 mln option at $1.1825 that will be cut.  The $1.1850-area may be sufficient to cap it today.

Sterling edged up to $1.3800, a two-week high. Soft and figures may have encouraged the pullback in Europe to the $1.3760 area. The 200-day moving average was found near $1.3810. Meanwhile, the euro was approaching the GBP0.8600 cap that has held this month.


Pending July and the were consistent with the recent string of US reports that have been weaker than expected. As the second month of the quarter winds down, look at Q3 GDP forecasts. The Fed’s GDP nowcasts have softened. The NY Fed has Q3 GDP tracking 3.8%, while the Atlanta Fed’s model puts it at 5.1%, with the St. Louis Fed at 4.9%.

This makes the median forecast in Bloomberg’s survey of 6.9% seem high. But it is not just that the Fed’s models are updated more frequently. The last four contributions to the Bloomberg survey averaged 7.7%. However, it was flatted by one forecast that is the highest in the survey, for 11.2%. The others at 6.5%-6.6% were still above the Fed’s trackers.

Today’s US data features house prices (FHFA and CoreLogic). House prices are still rising. The will also be released. The market expects a softer report, but the risk is on the downside after the survey showed a sharp drop (10-year lows).

Tomorrow, the ADP reports its estimate. The Bloomberg survey median is for 625k after a 330k increase in July. Canada reports June monthly . A sharp recovery is expected after a 0.3% contraction in May. Growth in Q2 is seen at 2.5% annualized.

Mexico’s central bank releases its inflation report. While price pressures are still on the upside, the two hikes (July and August) may see Banxico pause in September.

Brazil sees June (14.4% vs. 14.6%) and its July budget. Of note, reports suggest that Brazil has surpassed the US in the proportion of adults with a single vaccine. Lastly, Chile’s central bank is expected to hike its overnight by 50 bp to 1.25%. It lifted the key rate by 25 bp in July and signaled the start of a sequence.

The US dollar was trading at ten-day lows against the . It entered an area that may prove sticky ahead of today’s options expiry. There were options for $1.2 bln at CAD1.2560. The low in Europe was CAD1.2570. There was another option that may be being absorbed for $645 mln at CAD1.2575. The greenback was fraying the uptrend drawn off the July 30 low and came in today near CAD1.2585. Initial resistance was pegged in the CAD1.2600-CAD1.2620 area.

The US dollar was seeing more follow-through selling against the after posting an outside down day at the end of last week. Dollar selling yesterday was limited to MXN20.11 and the 200-day moving average. Selling today pushed the greenback to roughly MXN20.0650, an eight-day low. The next area of support was around MXN20.00.

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